Optimal Asset Market Operations

Yu-Ting Chiang and Piotr Żoch
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Yu-Ting Chiang: https://research.stlouisfed.org/econ/chiang/oc/

No 2025-014, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We provide a unifying theory of how governments should trade assets in response to economic disturbances. Across a broad class of models with financial frictions, the first-order Ramsey plan is characterized by a target relationship among asset returns. The relationship is determined by empirically measurable asset demand and supply elasticities and can be implemented without having to identify the underlying frictions or disturbances. Due to financial frictions, optimal policy may preserve or widen spreads between returns to steer intermediation; absent this concern, the target stabilizes spreads across assets. Applied to the U.S. economy, the target calls for supplying liquid assets and absorbing illiquid assets during the 2008–09 financial crisis while maintaining a sizable spread.

Keywords: optimal policy; public portfolios; financial frictions; sufficient statistics (search for similar items in EconPapers)
JEL-codes: E2 E6 H3 H6 (search for similar items in EconPapers)
Pages: 69 pages
Date: 2025-06-16, Revised 2026-09-16
New Economics Papers: this item is included in nep-cba and nep-fdg
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DOI: 10.20955/wp.2025.014

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